Reddy, Johnson Q & A, commercial law 2009–2010 2009-1

Q&A COMMERCIAL LAW 2009–2010

was very pleased with the purchase because he had a customer who would pay handsomely for such a vase.

On 12 March, Philip left the vase with his customer to see if he would be interested in buying it for £4,000. The vase was returned two days later because it emerged that it was not genuine and that it was worth less than £250. A week later, during a dinner party, Philip discovered that water leaked from the vase which he was using to display a bunch of flowers.

Philip contacted China Emporium immediately, demanding his money back, and he was told that it was not the shop’s policy to make refunds in any circumstances.

Advise Philip.

Answer plan

The central issue in advising Philip is whether he is better off arguing that the pre-contractual statement that the vase was a ‘Shing’ vase had become part of the contract or suing for misrepresentation. The main points that need to be considered are as follows:

•China Emporium’s policy about not refunding money (was this part of the contract anyway?);

•description: s 13 of the Sale of Goods Act 1979;

•satisfactory quality: s 14(2);

•fitness for purpose: s 14(3);

•misrepresentation, common law and the Misrepresentation Act 1967;

•when a buyer loses the right to reject goods (acceptance/affirmation);

•remedies.

Answer

Philip has bought a vase which he now wishes to return and has been told that he is not entitled to a refund of the purchase price. It is clear that any attempt to restrict or limit liability is subject to the strict requirements of incorporation. China Emporium’s policy of refusing refunds in any circumstances cannot be effective to prevent Philip from pursuing the matter against them if a term to that effect has not been incorporated into their contract. We are not told what the express terms and conditions were under the contract, or whether reasonable notice of the policy had been given before or at the time of the contract. Indeed, if there was such a notice displayed, perhaps in the shop, then such a term will be incorporated within their

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contract even if Philip did not read it. Assuming that there was no such notice, China Emporium is not entitled to rely on a policy which has not been disclosed to Philip, and the question of whether or not the policy is reasonable is not in issue. If there were such a notice, it would probably be ineffective by virtue of the Unfair Contract Terms Act 1977.

It is clear that Philip was not dealing as a consumer. Thus, the amendments to the law made by the Sale and Supply of Goods to Consumers Regulations 2002 do not apply. Whether Philip has the right to return the vase will depend on finding a breach of a term of the contract or an actionable misrepresentation. There are four possible grounds here:

•description;

•satisfactory quality;

•fitness for purpose;

•misrepresentation.

Description

The relevant description in this case is that it was a ‘Shing’ vase. Section 13 of the Sale of Goods Act 1979 states that where goods are sold by reference to a description, it is an implied term that the goods should correspond with the description. In considering whether the sale is one by description, the court will have regard to

Harlingdon and Leinster v Christopher Hull Fine Art Ltd (1990), that is, whether the seller in making the description has held himself out as having special knowledge and whether the buyer has relied on that description. In that case, a painting was sold described by art dealers, who were not experts in German art, as one by the German painter Gabriele Münter. The buyer who did not make further inquiries, but was an expert in German art, bought the painting for £6,000. It later transpired that the painting was a fake, worth less than £100, and the buyer rejected the painting on the ground that it did not comply with its description. The Court of Appeal held that the sale was not one by description since the description was not influential in the sale.

Applying the Harlingdon case to the question, although we are told that Philip is a well-known dealer in antique vases, we are not told whether China Emporium, with its name, was a known expert in this type of vase. Only if it was within the reasonable contemplation of the parties that Philip would rely upon the description ‘Shing’ could there be a sale by description. If China Emporium was, unlike the art dealers in Harlingdon, knowledgeable in ‘Shing’ vases, or held itself out to be, Philip would be entitled to reject the vase and claim damages.

We are told that Philip examined the vase before agreeing to buy it. A sale of goods is not, however, prevented from being a sale by description solely because the buyer himself selects the goods (s 13(3) and Beale v Taylor (1967)).

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Satisfactory quality

China Emporium clearly sells in the course of business so the implied term in s 14(2) applies. The goods will not be of satisfactory quality if they do not meet the standard a reasonable person would regard as satisfactory, taking account of the price, any description and all other relevant circumstances (s 14(2A)). One relevant aspect of their quality is their fitness for all the purposes for which goods of the kind in question are commonly supplied. The issue which needs to be looked at here is whether the vase was fit for the purposes for which it might commonly be supplied. Philip paid £3,500 for the vase. It is reasonable to assume that most people paying this high price for a vase will be buying it as an investment or for its resale value. Thus, the vase should be of satisfactory quality as an investment, but what of the fact that the vase is only worth £250? The Court of Appeal considered this point in the Harlingdon case, and Nourse LJ’s view was that the purpose or purposes for which goods of this kind are commonly bought are the ‘aesthetic appreciation of the owner or anyone else he permits to enjoy the experience’. Thus, even if there was a defect in the quality of the vase, it was not one which made it ‘unsaleable’. The question of whether goods are reasonably fit for resale cannot depend on whether they can or cannot be resold without making a loss. The test is an objective one, not dependent on the purpose for which Philip himself required the vase. It seems, therefore, that since most people would have bought the vase for its aesthetic appreciation, the fact that it was not a ‘Shing’ vase did not make the vase unfit for aesthetic appreciation which, despite its value being so much lower than the price, did not mean that the goods were of unsatisfactory quality.

We are told that Philip subsequently discovers that the vase leaks when he uses it to display a bunch of flowers. Can Philip claim that this rendered the vase of unsatisfactory quality? Before the 1994 amendments to s 14, there was authority that the term as to merchantable quality did not require that the goods were reasonably fit for all the purposes for which goods of that description were commonly supplied, and that it was sufficient if they were fit for one of those purposes (Aswan v Lupdine (1987)). Now, however, s 14(2B) provides that one aspect of the quality of the goods is their fitness for all the purposes for which goods of that kind are commonly supplied. Certainly, vases are commonly supplied for use as display containers holding fresh flowers and water. It is difficult to know if that is one of the purposes for which ‘Shing’ vases are commonly supplied. If it is, then the fact that the vase leaks suggests that it is not of satisfactory quality. If such vases are, however, commonly supplied for only one purpose, aesthetic appreciation (without containing fresh flowers), then the fact that it leaks will not make it of unsatisfactory quality.

Fitness for purpose

Section 14(3) provides that where goods are required for a particular purpose which

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has been made known to the seller, there is an implied term that the goods should be reasonably fit for that purpose. This will not apply if Philip did not rely or it was unreasonable for Philip to rely on China Emporium’s skill and judgement in supplying the goods. In relation to the problem, two questions therefore need to be asked. Firstly, did Philip make known to China Emporium the exact purpose for which the vase would be required? Secondly, if so, was it reasonable for him to rely on China Emporium’s skill and judgement? The answer to the first question seems likely to be ‘yes’, since Philip is a well-known dealer and it is therefore reasonable to assume that if China Emporium is aware of this, it would also know that Philip would have bought the vase for resale as an antique item. The answer to the second question, however, is likely to be ‘no’, because, as was discussed in relation to ‘description’ (above), as between the parties Philip was the expert in ‘Shing’ vases and it would be unreasonable for him to rely on China Emporium’s skill and judgement. It seems, therefore, that China Emporium is not liable under s 14(3).

Misrepresentation

The false statement that the vase was a ‘Shing’ vase may amount to an actionable misrepresentation, entitling Philip to rescind the contract and claim damages. The requirements of an actionable misrepresentation are that there was a statement of an existing fact by one party which induced the other party to enter the contract. It must be a statement of fact and not opinion, although an opinion which is not honestly held at the time or is based on facts which the maker of the statement ought to have known may be actionable.

It is clear from this question that the shop assistant did describe the vase as a ‘Shing’ vase. Philip’s reliance on this description does not have to be reasonable (Museprime Properties v Adhill (1990)). The court held in the Museprime Properties case that the reasonableness of the reliance was relevant to determining whether there was actual reliance, but that the test of reliance is subjective (the more unreasonable the reliance, the less likely the court is to believe that it did actually affect the buyer’s decision to enter into the contract). It is also clear that the statement does not have to be the sole reason for entering into the contract; it is sufficient that it was one reason (Edgington v Fitzmaurice (1885)). It may be, therefore, that Philip has a stronger claim in misrepresentation than under the implied conditions under the Sale of Goods Act.

Once it has been established that an actionable misrepresentation has been made, the remedies will depend on whether the misrepresentation was made innocently, negligently or fraudulently.3 It is unlikely that the shop assistant will have made the

3A detailed knowledge of misrepresentation is not usually required on commercial law courses, but bear in mind that the examiner is entitled to test you on the general principles of contract law.

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statement that it was a ‘Shing’ vase fraudulently. Either he made it innocently (that is, in genuine ignorance of the fact that it was untrue) or negligently (that is, he had no reasonable grounds for believing that the statement was true) under s 2(1) of the Misrepresentation Act 1967.4 If the misrepresentation was made innocently, Philip will be entitled to rescission of the contract. If the misrepresentation was made negligently, Philip will be entitled not only to rescission, but he may recover for all losses caused by the misrepresentation, unrestricted by the rules of remoteness (Royscot Trust Ltd v Rogerson (1991)). Moreover, in East v Maurer (1991), it was held that this included lost profits.

One final point which needs to be made is that whether Philip decides to pursue the matter for breach of contract or for misrepresentation may depend on the fact that it was some three weeks after he bought the vase that he tried to reject the goods against China Emporium. Any action for breach of contract is subject to the rules of acceptance under s 35 of the Sale of Goods Act which, inter alia, deems the buyer to have accepted the goods if, after a lapse of reasonable time, he retains the goods without intimating to the seller that he rejects them. In Bernstein v Pamson Motors (1987), a period of three weeks was regarded as beyond a reasonable time in which to examine a motor car. Since then, s 35 has been amended and a reasonable period now will normally include a reasonable opportunity for the buyer to examine the goods for the purpose of ascertaining whether they conform to the contract. This may well mean that the reasonable period of time before the buyer is taken to have accepted the goods will be longer than previously (Clegg v Andersson (2003)). Philip has in fact had the vase for over three weeks before giving notice of rejection. Furthermore, he discovered after two weeks that it was not a ‘Shing’ vase. Assuming that that is a breach of condition, it is arguable that keeping it a further week afterwards before rejecting it amounts to acceptance. If, however, he was using that week in order to have experts examine it to confirm whether or not it was a ‘Shing’ vase (although we are told nothing to suggest that he was), that would have the effect of lengthening the reasonable period of time (Truk v Tokmakidis (2000)). If he has accepted the goods, then his only remedy for breach of contract would be a claim for damages, the amount of which would depend greatly on whether, on the one hand, he could establish a breach of contract arising out of the description ‘Shing’ vase or, on the other, was able only to rely on the fact that the vase leaked.

An action in misrepresentation is not subject to the acceptance rules and a buyer is only deemed to have lost his right to rescind if he has affirmed the contract which, after three weeks, it may be held that he has done. If it were established that the misrepresentation were fraudulent, then time would begin to run only from when

4It is possible, of course, to bring the action under the common law, that is, under the rule in Hedley Byrne v Heller (1964). Since the Misrepresentation Act 1967, however, s 2(1) is the preferable cause of action because then the burden of proof is on the defendant to show that there were reasonable grounds for believing that the statement was true.

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Philip discovered the truth. It seems that Philip knew of the lack of authenticity of the vase around 14 March and it was only a week later that he contacted China Emporium. Thus, if it was a fraudulent misrepresentation, Philip would be able to rescind the contract. He would in any case be entitled to damages for misrepresentation, unless China Emporium could show that it had reasonable grounds to believe it was a ‘Shing’ vase.

Question 8

Harriet wants to buy a washing machine. She walks into a branch of CleanEazi Ltd and asks Bob, the sales assistant for his advice. She tells him that she needs a machine that has a quick wash cycle. Bob recommended the Helper because, on average, it requires just 30 minutes for a wash cycle at 50 degrees Celsius. The machine is delivered later that day.

It turns out that for a wash cycle at 50 degrees Celsius the machine requires, in fact, 60 minutes. Two weeks later, the machine is beginning to make funny noises and starts belching smoke. The load it is washing at the time is completely destroyed. When Harriet phones Bob to ask for her money back, Bob tells her that the contract Harriet signed included a clause stating: ‘All conditions relating to the quality or condition of any machine are hereby excluded. The seller accepts no liability in respect of any statements made prior to the contract unless such statements have been put in writing.’

Advise Harriet.

Answer plan

The issues raised in this question are:

•liability for breach of the conditions as to satisfactory quality and fitness for purpose;

•liability (for an express term and/or misrepresentation) arising out of the statement about the washing machine needing only 30 minutes for a wash cycle;

•the remedies available to the buyer and, in particular, whether there has been acceptance of the goods so as to preclude rejection;

•the exclusion clause. The method of dealing with it is, after quickly acknowledging that it was incorporated into the contract, to deal with the interpretation of the clause and then the effect of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.

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Answer

This question raises issues of liability for express and implied terms of the contract and the extent of any remedies available to Harriet, bearing in mind the seller has purported to exclude liability.

Express term

When Harriet told Bob she needed a washing machine capable of a quick wash cycle, he recommended the Helper because, he said, it needed just 30 minutes for a wash cycle. This may have amounted to an express term. Assuming it was an express term of the contract, it is clear that that express term was broken in Harriet’s case because the wash cycle, in fact, took 60 minutes.

Satisfactory quality

Since CleanEazi sells in the course of business, terms regarding satisfactory quality and fitness for purpose are implied as conditions into the sale contract with Harriet. Under s 14(2) of the Sale of Goods Act 1979 there is an implied condition that goods sold should be of satisfactory quality. No reasonable person would regard the washing machine as satisfactory if after such a short period of time (two weeks) it makes funny noises and starts belching smoke. It is unlikely that Bob specifically drew this defect to Harriet’s attention before the contract was made. We are not told whether Harriet made a pre-purchase examination of the washing machine, as regards any defect which ‘that’ examination ought to have revealed. Even if she did examine the machine, it is unlikely this would have revealed the defect. It seems therefore that Harriet can rely upon the condition in s 14(2). The machine belches fumes, ruining the load it was washing at the time. A reasonable person would not regard the machine as satisfactory, taking account of any description given to the goods, the price and any other relevant circumstances (s 14(2A)). We are not told what price Harriet paid for the machine nor whether it was bought as new or secondhand goods. The general approach is that the higher the price paid, particularly for new goods, the higher the standard the buyer can expect. However, in Harriet’s case, the defects are sufficiently serious to render even second-hand goods of less than satisfactory quality.5 Therefore, it is submitted that Harriet has a valid claim under s 14(2).

Fitness for purpose

Harriet’s claim in respect of the defects discussed above might equally be made under s 14(3). Since the description of the goods (‘washing machine’) points to one purpose

5 Crowther v Shannon Motors (1975).

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only, the washing machine must be fit for that particular purpose (Preist v Last (1903)) and it is clear that the defects already being relied upon under s 14(2) render the washing machine not reasonably fit for that purpose and this a breach of the implied condition in s 14(3). In addition, Harriet told Bob that she needs a machine that has a quick wash cycle. The machine recommended to her was not capable of this. Since it is reasonable for Harriet to place reliance upon Bob’s skill and judgement in respect of his recommendation, Harriet will have a claim under s 14(3).

Exclusion clause

Like any exclusion clause, the clause in this case will not have any effect unless it satisfies each of the following requirements:

•it was incorporated into the contract;

•as a matter of interpretation, the wording of the clause is effective to exclude liability which otherwise the seller would incur;

•the clause is not rendered invalid by either the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999.

Clearly, in the present case, the first of these requirements is satisfied since we are told that Harriet had signed the contract (L’Estrange v Graucob (1934)).

Interpretation of the clause

As regards the second requirement, the first half of the clause would clearly exclude liability for breach of the implied condition as to satisfactory quality in s 14 of the Sale of Goods Act 1979. The words of the clause are clear and there is no longer any presumption (at common law) that the clear words of a clause are not to be given effect, and that is so even if they clearly purport to exclude what used to be referred to as a fundamental breach of contract (Photo Productions v Securicor Transport (1980)). Does it also exclude liability for the condition of fitness of purpose? The contra proferentem rule of construction which the courts use in construing exclusion clauses requires that, where a clause is truly ambiguous, the meaning which gives the clause the lesser effect is adopted. This is the rule as applied over the years in such cases as

Wallis and Wells v Pratt and Haynes (1911) and Andrews v Singer (1934). Nothing in the Photo Productions case does away with the contra proferentem rule in cases of true ambiguity. Referring to the wording of the clause, the condition as to fitness is excluded if it relates to the ‘quality or condition’ of a machine. Clearly, on the facts of the problem given, it is the quality which is in issue and, undoubtedly, the quality of a washing machine can affect its fitness for a particular purpose. However, the fitness for purpose condition implied by s 14(3) is not confined to matters of quality or condition. A machine can be of excellent quality and in excellent condition and still not be fit for a particular purpose for which the buyer has indicated she wants it. Here, Harriet told Bob that she wants a machine capable of quick wash cycles. If the

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clause in issue here were held to exclude the condition as to fitness for purpose, it would rule it out in the latter situation, as well as where the unfitness is caused by defects in quality or condition. Applying the contra proferentem rule, therefore, it seems likely that a court would hold that the fitness for purpose condition was not excluded.

It appears then that the first sentence of the clause, as a matter of interpretation, does exclude liability for breach of the condition as to satisfactory quality, but may well not do so as regards the condition of fitness for purpose.

Let us turn to the matter of CleanEazi’s possible liability in respect of the precontract statement about the washing machine being capable of a 30-minute wash cycle. The latter part of the clause would appear to exclude that liability, since there is no indication that Bob’s statement was put into writing. There is, however, an argument which might prevent such a conclusion. It is possible that Bob’s words might give rise to liability for breach of an express term of the contract (Andrews v Hopkinson (1957)). The clause refers to statements made ‘prior to the contract’. It does not refer to statements which are part of the contract itself, which an express term – even one not reduced to writing – would undoubtedly be. So it might be argued that the clause was not intended to exclude express terms. The point is clearly an arguable one, since it could alternatively be said that the intention of the clause is to exclude all liability in respect of precontract statements, including terms of the contract itself, unless those terms are in writing.

Unfair Contract Terms Act 1977

Assuming that the clause is effective at common law to exclude at least some possible liabilities, is it robbed of that effect by the Unfair Contract Terms Act (UCTA) 1977? This Act applies differently to different heads of liability. Section 6 deals with the clause insofar as it purports to exclude liability for breach of the implied conditions in s 14 of the Sale of Goods Act 1979. Since Harriet dealt as a consumer in buying the washing machine, neither of those implied terms can be excluded.

Let us turn to the effect of the UCTA on the clause insofar as it purports to exclude liability for breach of unwritten express terms of the contract. The clause is subject to the requirement of reasonableness. This is provided for by s 3 of the UCTA. Section 3 will apply since it appears that the clause in question is one of CleanEazi’s standard terms. Technically, s 3 does not refer to Sched 2 which offers guidelines as to whether or not a clause is reasonable. However, there is little doubt that similar considerations will be applied. The court is very likely to consider the clause as a whole in deciding whether it satisfies the requirement of reasonableness.

In any case where that requirement is under consideration, account needs to be taken of the factor, highlighted in the cases, that a clause which does not merely limit liability but purports totally to exclude it is much less likely to satisfy the

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requirement of reasonableness (compare Mitchell v Finney Lock Seeds (1983) and Ailsa Craig Fishing v Malvern Fishing (1983)). It has already been said that perhaps the clause in Harriet’s case will, on its wording, be held not to exclude liability for the condition as to fitness for purpose or for breach of an express term of the contract. Even so, in relation to those liabilities which it does purport to exclude, its exclusion of liability is complete. This fact strengthens the argument that the clause fails to satisfy the requirement of reasonableness.

Unfair Terms in Consumer Contracts Regulations 1999

Since Harriet has contracted as a consumer, the 1999 Regulations will apply to her contract with CleanEazi (reg 4). The effect of these Regulations will render the exclusion clause of no effect since, contrary to a requirement of good faith, the clause causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. The exclusion clause in question is likely to be declared ‘unfair’.

Remedies

For any breach of contract, there is a right to claim damages. Since the Sale and Supply of Goods to Consumers Regulations 2002 are in force, Harriet has additional rights if an item purchased is not of satisfactory quality or not reasonably fit for its purpose. She is in principle entitled to claim a remedy of repair or of replacement of the item, unless such a claim would be disproportionate. If such a claim would be disproportionate or, alternatively, if such a claim is made and not complied with within a reasonable time, then Harriet is entitled to a reduction in the price or to rescind the contract. It appears that these additional rights are not what Harriet wishes to claim for. We are told that she wants to reject the machine. Assuming that there was breach of the implied term in either s 14(2) or s 14(3), Harriet undoubtedly has a right of rejection, since both of those terms are implied conditions. The same is not necessarily true of the express term (that the wash cycle is complete in 30 minutes), since it would have to be decided if the parties intended it to be a condition, that is, a term any breach of which would give Harriet the right to reject the goods and regard the contract as repudiated. The tendency of the courts is not to regard as a condition any express term (other than one as to the time of delivery), unless the parties have very clearly indicated it (Cehave v Bremer, The Hansa Nord (1976)). Thus, the test of whether Harriet had any right of rejection/ repudiation for breach of the express term depends upon whether the breach was sufficient to deprive Harriet of substantially the whole of the benefit of the contract (Hong Kong Fir v Kawasaki Kisen (1962)). It is possible that the fact that the machine needs more than 30 minutes to complete the wash cycle was not sufficiently serious.

Assuming that Harriet was, because of the breach of the conditions in s 14,

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